The evolution of the cannabis market in Canada continues to be a crucial case study. There is a lot we can learn about how business models are taking shape and the headwinds being faced in the legalized medical environment that the Canadian MMPR provides.

Visual Capitalist recently released a report that takes a snapshot of the current MMPR market at the end of April. The combination of surveys, reviews, and independent data collection is a launching point for a look at Canada’s licensed producers, its patients, and the current product offerings for consumers.

We will review some of the data points in this snapshot, and discuss the recent stock performance of the publicly-traded producers as well as the recent landmark “Smith” case.

Refresher Course

As a quick primer, remember that the MMPR replaces the older MMAR program in Canada that allowed patients with a medical need to grow or purchase cannabis for personal use. The new MMPR requires patients to buy their cannabis from licensed producers within the provinces. Many patients under the old MMAR have not enrolled in the new system, and are still procuring their cannabis on the black/gray markets, where prices per gram run less than half of the average seen at the LPs. After all, the MMAR was in place for many years, which allowed a reasonable underground supply chain to be created.

There are roughly 50,000 patients currently enrolled in the MMPR, and/or grandfathered under the older rules, and Health Canada estimates that there will be about 450,000 medical cannabis patients by 2024, bringing in over $1.3 billion annually. After an initial supply shortage as the federal cultivation licenses were handed out, there are now 19 full licensed producers (out of 1,300 applicants), along with six firms that have production-only licenses.

The cultural backdrop in Canada is very favorable to legalization efforts: a recent survey states that 59% of Canadians support legalizing marijuana, and there are leading political figures that have announced support for full legalization.

Diving into the Particulars

The Visual Capitalist report analyzes 16 LPs on key attributes like geographical reach, strain availability, customer service and average price per gram sold. The data collection for this Spring 2015 snapshot took place over a 2-week period at the end of April, and while the dataset isn’t meant to be a statistically significant sample size, it does gives us key insights into how the LPs are positioning themselves, what they are sending out the door to patients, and how pleased those patients are with the service and product.

Some producers are racing to achieve the biggest scale, reach and brand recognition, despite strict anti-advertising rules. Companies like Tweed (TSXV: TWD) and Tilray, owned by the well-funded Privateer Holdings, are in a race to be the largest LPs in terms of cannabis production and enrolled patients. The belief is that by increasing scale, a company can streamline operational costs per gram and gain customer appreciation by always having a consistent supply of the strains patients want.

Tweed, the largest publicly-traded LP in terms of market capitalization, shows off its production scale by offering over 35 strains. The company is also offering some broad spectrum pricing, with strains available from $4.80/gram to $12/gram. Tilray shows a similar strategy, offering strains from between $6/gram all the way to $15/gram.

Other firms are trying to differentiate themselves by offering all-organic strains, pharmaceutical-grade regimented medicines, and discount/loyalty programs to preferred customers. A key trend in Canada is the emergence of high-CBD cannabis strains at a level we just don’t see here in the states. High-CBD strains, which are on the leading edge of medical research for several conditions, can now be found at five different LPs, all with a CBD percentage above 10%.

Niche vs Scale

It remains to be seen how the legal issues surrounding cannabis use and cultivation, recommendations by doctors—cannabis is still touted as having “no medical value” by Health Canada—and the political climate will affect patient enrollment numbers in the coming years. It is estimated that there are over 500,000 people in Canada that consume cannabis, with the vast majority being served by gray markets. If the bulk of those people find no use or need to buy from a LP, then the companies serving niche markets will find it hard to grow beyond anything more than a glorified mom and pop store.

On the distant horizon, however, is a future that may offer a chance for Canadian LPs to export products to a global consumer base. We are a long way away from this hypothetical, but should the world come around to the reasonable side of history, then the head start Canadian companies have in scaling their business could prove to be a tremendous competitive advantage—even against U.S. companies.

Stock Performance

The recent performance of the five publicly-traded LPs has been very poor, mirroring what investors have seen in the cannabis-based stocks here in the U.S. The bad performance is based mainly on the fact that there just aren’t many patient enrollments and product revenues to go around. Companies are beginning to clearly differentiate themselves in their value propositions. With the exception of Aphria Inc (TSXV: APH), all of the stocks have fallen over 10% this year, on top of losses in the back half of 2014.

Other than the steady increase in patient rolls, there is no bigger potential catalyst for these stocks than the recent Supreme Court of Canada ruling in the R. v. Smith case, which opens the door for companies to begin offering cannabis extracts and derivatives to patients. There is still a lot of legal red tape to get through, but considering that over half of Colorado’s cannabis revenues in 2014 came from product derivatives, there is a lot of potential revenue to be explored here. The Canadian LPs currently have to incinerate their unused plant material, a tremendous waste of product that could go toward creating oils, edibles and distillates in the future.

Ryan has spent nearly 20 years analyzing financial markets and investment opportunities for institutional and high-net worth investors. He specializes in determining the size and scope of new markets, changing industry trends and the market potential of new companies, products and services. Ryan has also published hundreds of articles on investment topics, market commentary and macroeconomic analysis.

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